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Fiscal Policy in a Currency Union at the Zero Lower Bound

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Listed:
  • Cook, David

    (Asian Development Bank Institute)

  • Devereux, Michael B.

    (Asian Development Bank Institute)

Abstract

When monetary policy is constrained by the zero lower bound, fiscal policy can be used to achieve macro stabilization objectives. At the same time, fiscal policy is also a key policy variable within a single currency area that allow policy makers to respond to regional demand asymmetries. How do these two uses of fiscal policy interact with one another? Is there an inherent conflict between the two objectives? How do the answers to these questions depend on the degree of fiscal space available to different members of the currency area? This paper constructs a two-country New Keynesian model of a currency union to address these questions. We find that the answers depend sensitively on the underlying internal structure of the currency union, notably the degree of trade openness between the members of the union.

Suggested Citation

  • Cook, David & Devereux, Michael B., 2018. "Fiscal Policy in a Currency Union at the Zero Lower Bound," ADBI Working Papers 801, Asian Development Bank Institute.
  • Handle: RePEc:ris:adbiwp:0801
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    More about this item

    Keywords

    liquidity trap; monetary policy; fiscal policy; international spillovers;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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